Tax to the future

Out with the old, in with the revenue

Well, what do you know?

As we near the end of FY 2019, General Revenue collections have already come in $360 million ahead of the year’s estimate, which will ensure a large end-of-year deposit to the Rainy Day Fund. Next year’s revenue collections are projected to be more than 20 percent higher than last year’s, which has allowed the Legislature to approve two straight years of substantial funding increases. (OK Policy)

How did that happen?

Magic.

Actually, it was math.

During the 2018 legislative session (the special 2017 session started the ball rolling), Oklahoma legislators raised taxes—most notably on the production of oil and gas, the extraction industry’s pouting notwithstanding. If it had any manners, the O&G sector in Oklahoma would have simply thanked state taxpayers for their largesse over the past decade and tiptoed out of the building.

Until 2017, some older wells were taxed at just 1 percent during their first three years of production while new wells were taxed at just 2 percent for three years. (OK Policy)

You’re welcome. 

To put this in context, figures from 2016, show the following gross production tax rates nationwide (OK Policy): 

    Wyoming: 13.4 percent
    Louisiana: 13.1 percent
    Arkansas: 12 percent
    Texas: 8.3 percent 

States known for their (ahem) hotbeds of socialism and liberalism.

Oklahoma averaged 3.2 percent for the same period, the lowest in the nation; still, after the modest increases of 2017 and 2018, industry executives warned they just couldn’t (and wouldn’t) do any more. 

Devon Energy executive Wade Hutchings, chairman of OKOGA [Oklahoma Oil & Gas Association], told the crowd his association is very much supportive of an effective education system as well as a pay raise for teachers. (OK Energy Today)

What a prince. 

“But I’ll just be very clear here. We will not back down from a very clear position that any increase in taxes on new wells drilled in Oklahoma will ultimately result in a loss of wells being drilled. That principle is iron clad with us.” (OK Energy Today)

 You want some low density crude with that whine? 

And guess what?

Over the 12-month period through February 2019, Oklahoma oil production averaged 17 million barrels, which is 30 percent higher than during the peak years of the early 1980s.

You mean the oil and gas industry didn’t just pack up its rigs and move to New Jersey in protest?

Of course not. And why not?

Because New Jersey doesn’t have oil and gas deposits.

Now a word from the Almighty, a.k.a. George Kaiser (with his philanthropy in these parts, it’s hard to distinguish between the two):

“We drill where God put the hydrocarbons, not where the tax rate is lowest.” (Tulsa World)

Kaiser, himself an oil guy, slammed home this point by reminding us in an editorial in The Tulsa World that the benefits from those lower GPT rates all those years didn’t stay in the state anyway. 

More than 70 percent of the benefit goes to out-of-state shareholders of publicly held companies at the expense of Oklahoma taxpayers.

But it wasn’t just the Gross Production Tax that fueled Oklahoma’s newfound cash flow. There were also bills that added $1 to a pack of cigarettes, three cents to a gallon of regular gasoline, six cents to a gallon of diesel, and mandated sales tax on online purchases. 

Income taxes weren’t raised, which would have made the most impact and been the fairest revenue measure—smokers, after all, didn’t cause the budget crisis—but it was heartening that legislators recognized the debate was no longer how big or small government should be, but how much government we need in Oklahoma. For too long in the state, and the country for that matter, government was seen as a beast that needed to be starved—and then, once starved, could then be criticized for being lethargic, inefficient and unresponsive. 

These revenue bills at times had to be dry-birthed, but eventually were all signed into law by then-Gov. Mary Fallin, who, while not actually seizing the moment, didn’t let it go by, either. 

“This is a very historic moment in Oklahoma,” Fallin said. “I’m pleased to sign this bill that provides a significant increase in spending for our public school system. I’m hoping this additional funding will result in improved K-12 public school results. Our job as a state is to empower our students, parents and teachers to succeed by setting the bar high and challenging each other to succeed.” (Tulsa World)

And then a funny thing happened in the 2019 legislative session, even with the rosier figures. Not one representative proposed a new round of tax cuts. Now, I wouldn’t bet the combine harvester that such restraint makes it all the way through the 2020 session, but it’s worth mentioning there seems to be a new-found financial maturity.

That cutting taxes would spur growth and pay for themselves, while raising them would stifle such expansion, really only ever made sense on a bar napkin, anyway. 

[Dick] Cheney wasn’t following. So [Arthur] Laffer grabbed a napkin, uncapped a Sharpie, and drew two perpendicular lines and a blimp-shaped curve, halved by a faint dotted line. With the tax rate on the y-axis and tax revenue on the x-axis, the chart showed that, except at its bend, there were always two points on the curve that generated the same amount of government funds: a higher rate on a smaller base of economic activity, and a lower rate on a larger base of economic activity. (Quartz)

Not everyone was impressed, and this includes economists who rarely agree with each other.

Harvard economist N. Greg Mankiw, an outspoken conservative who led George W. Bush’s Council of Economic Advisors, has called supply-siders “Charlatans and Cranks” and compared them to a “snake-oil salesman.” Paul Krugman, the liberal New York Times columnist and Nobel Prize–winning economist, often argues with Mankiw on economic policy, but also thinks, “The supply-siders are cranks” who adhere to a doctrine “without a shred of logic or evidence in its favor.” (New Republic)

And while there are still plenty of fans of supply-side economics—one huge one (but we’ll get to that in a moment)—there is also this:

Supply-siders often credit President Reagan’s huge 1981 tax cut with spurring robust growth in the ensuing years. But while growth was strong during the 1980s, it was stronger still in the years following President Clinton’s 1993 tax increase on top earners. Whereas GDP grew at an average annual rate of 3.5 percent during the seven years following the 1981 cut, it grew at 3.9 percent per year over the seven-year period following the 1993 tax increase. (Democracy Journal)

Cuts to Oklahoma’s income tax began in earnest around 2004, when the top figure was 6.65 percent—it’s about 5 percent today—and the reduced revenues over the years go a long way in explaining teacher shortages, college tuition hikes, understaffed and combustible prisons, lower reimbursement rates for medical providers and, until this year, budget deficits.

And both parties share the blame.

The cautious approach to tax cuts was abandoned in the mid-2000s, once Democrat Brad Henry became Governor and Republicans gained control of the House of Representatives. (OK Policy)

The mindset was codified back in 1992, when voters approved State Question 640, which stipulated that revenue bills could only become law if approved by a 3/4th vote of both legislative chambers. You can’t get 75 percent of Oklahoma legislators to agree Jesus didn’t tap Donald Trump on the shoulder and tell him to run for president, so the—and I’ll use the word—courage it took for state representatives to propose and pass these tax bills was impressive, especially considering GOP party elders like Tom Coburn kept peppering them with the dusty, bankrupt tropes. 

Former U.S. Sen. Tom Coburn joined former Gov. Frank Keating and former Secretary of State Larry Parman in penning a letter that landed on the desks of Gov. Mary Fallin, Lt. Gov. Todd Lamb and lawmakers. The trio of conservatives quoted from Ronald Reagan in warning that, “Government is the problem” and “the problem is that government spends too much,” words they say apply directly 
to Oklahoma in 2017. (The Oklahoman)

Hoary clichés, line one? Take a billion dollars out of the treasury, Saint Tom, and the problem is not that government is spending too much—it’s that its ability to function has been gutted. 

Gov. Stitt, who never supported the tax increases when he was running for governor, now likes the way they look on his resume. 

“For the first time in state history, we are setting back an additional savings account of $200 million without the law forcing it,” Stitt said. “This is going to allow us, at the end of the year, to have $1 billion in our savings account.” (US News)

For him to suggest, though, that any of this had to do with him or his leadership skills is truly gobsmacking.

But let’s not dwell on that.

We end today’s episode with a joke from our own Will Rogers, circa 1934.

“Money was all appropriated for the top in hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickled down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night anyhow.”

Why bring that up now?

Because the father of supply-side economics and trickle-down economics, Arthur Laffer, he of napkin fame, was just awarded the Presidential Medal of Freedom by Donald Trump.

Whether national GOP reps want to admit it, whether their brethren and sistren in Oklahoma want to admit it, their economic policy going on 40 years now was literally based on a joke. 

Or maybe they knew it all along.